Summary: In contrast to emerging real economy destruction, the week begins on a positive note, as COVID-19 case growth appear to be slowing in most developed world countries. At the time of writing US futures are making a beeline for limit up and Asian indices firmly green, ASX 200 +4.33%, Nikkei 225 +4.44%, KOSPI +3.75%, Hang Seng +2.29%.
Italy, the new hotspot Spain and the UK have all reported a decline in the daily death toll, from a humanitarian perspective this is great news. President Trump also appears to have dialled back the severity of his warning, at the latest COVID-19 White House presser stated the outbreak was perhaps “levelling off”. "We see light at the end of the tunnel. Things are happening," Trump said, however we would still caution that the road ahead (or tunnel) is long and winding. A levelling off of cases could be more akin to the end of the beginning, rather than the beginning of the end as the real economy effects play out.
When it comes to the real economy effects and second order impacts of the COVID-19 containment measures, these show no sign of levelling off making the days exuberance look rife with complacency. This as Japan moves to declare a state of emergency April 7, Singapore locks down once again and pockets of emerging markets stresses show little sign of abating. The pressure of dollar strength and funding squeeze continues, although swapped lines have helped and dollar borrowing premiums have lessened. The sharp devaluation across multiple EM currencies may eventuate unintended economic dislocations that have capacity to spark risk whilst sentiment remains fragile. Flexible exchange rates will absorb the economic shock to a point before presenting secondary consequences.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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